Technical Stock Market Report

The good news is:   All of the major indices closed at all time or multi year highs on Thursday. 

The negatives:  There are no negatives, the market is in holiday mode, rising on low volume.

The positives:  Seasonality rules. The NASDAQ composite (OTC) has not been down in the coming week, during the 2nd year (after new years day) of the Presidential Cycle, since 1982 while the S&P 500 (SPX) has not been down since 1994.

The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio) in red.  Dashed vertical lines have been drawn on the 1st trading day of each month.  Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral 50% level.

OTC HL Ratio rose to 93% on Friday.

There are trading systems that impose a No Sell Filter when variations of this indicator are above 80%.

The next chart is similar to the one above except it shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio closed at a very strong 84%.

Money Supply (M2)

The money supply chart was provided by Gordon Harms.

Money supply growth declined a bit last week.

January

Since 1963, over all years, the OTC in January has been up 66% of the time with an average gain of 2.9%.  During the 2nd year of the Presidential Cycle January has been up 50% time with an average loss of -0.4% The best January ever for the OTC was 1975 (+16.6%), the worst 1990 (-8.6%).

The average month has 21 trading days.  The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10.  In months when there were more than 21 trading days some of the days in the middle were not counted.  In months when there were less than 21 trading days some of the days in the middle of the month were counted twice.  Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that.  The line is solid on the 11th trading day, the dividing point.

In the chart below the blue line shows the average of the OTC in January over all years since 1963 while the green line shows the average during the 2nd year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 65% of the time in January with an average gain of 1.3%.  During the 2nd year of the Presidential Cycle the SPX has been up 62% of the time with an average gain of 0.6%.  The best January ever for the SPX was 1987 (+13.2%) the worst 2009 (-8.6%).

The chart below is similar to the one above except it shows the average daily performance over all years for the SPX in January in red and the performance during the 2nd year of the Presidential Cycle in green.

Since 1979 the Russell 2000 (R2K) has been up 57% of the time in January with an average gain of 1.9%.  During the 2nd year of the Presidential Cycle the R2K has been up 67% of the time in January with an average gain of 2.0%.  The best January ever for the R2K, 1985 (+13.1%), the worst 2009 (-11.2%).

The chart below is similar to those above except it shows the daily performance over all years of the R2K in January in magenta and the performance during the 2nd year of the Presidential Cycle in green.

Since 1885 the DJIA has been up 64% of the time in January with an average gain of 1.0%.  During the 2nd year of the Presidential Cycle the DJIA has been up 66% of the time in January with an average gain of 0.8%.  The best January ever for the DJIA, 1976 (+14.4%), the worst 2009 (-8.8%).

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in January in cyan and the performance during the 2nd year of the Presidential Cycle in green.

Conclusion

Seasonal factors are dominant.  Next week should continue with modest gains on low volume.

I expect the major averages to be higher on Friday January 3 than they were on Friday December 27.

The last line of this report: YTD W 25/L 14/T 13, is the Year To Date score for my weekly forecasts.  Last year you got a bargain, my forecast was correct nearly half of the time.  Win, Loss or Tie is determined by looking at the Dow Jones Industrial Average, the S&P500, the NASDAQ composite and the Russell 2000.  If they all moved in the direction I forecast, I add a Win, if they go the other way it is a Loss and if any one of them moves in a different direction than the others, I call it a Tie.  In the 10 years I have been writing this letter in its present form, last year was my best ever.  I expect to revert to the mean next year.

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Disclaimer: Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy.   Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com).  Historical data is from Barron's and ISI price books.  The views expressed dare provided for information purposes only and should not be construed in any way as investment advice.  Furthermore, the opinions expressed may change without notice.